Countdown

The holiday-shortened week ahead should be a relatively quiet one for financial markets with numbers on recent economic activity generating less attention than future policy moves.-David Kelly, chief global strategist, JP Morgan Funds

Countdown

The holiday-shortened week ahead should be a relatively quiet one for financial markets with numbers on recent economic activity generating less attention than future policy moves.

On the economic numbers, both Producer Prices on Wednesday and Consumer Prices on Thursday should show very tame inflation for January. Next month’s numbers for February will be a different story, as higher gasoline prices should produce a significant lift to both measures. However, the short-term story is that, with very sluggish global demand and a recently rising U.S. dollar, near-term inflation pressures remain very much under control.

The Home Builders Index, on Tuesday, Housing Starts on Wednesday and Existing Home Sales on Thursday should all confirm the recent improvement in the housing market, although they may not show sequential improvement from December to January. Similarly, the Flash Markit PMI and the Philadelphia Fed Index should indicate that recently improved manufacturing conditions are being maintained, although the scope for further progress should be limited by weakness in the global economy. Jobless Claims will lack much information content as they will clearly have been impacted to an uncertain extent by last week’s monster storm in the North East.

Amidst all of this, markets will still be focused on global monetary and fiscal policy issues. The Japanese government may announce the name of the new head of the Bank of Japan – the more dovish the candidate, the more likely it is that the recent decline in the value of the Yen will continue. Italy will hold parliamentary elections which, although unlikely to result in a change in current fiscal policy, could give a reminder of how unenthusiastic the European public is about “austerity”. The Federal Reserve will release the minutes of its late January meeting – a record that will be read more closely than usual given the markets strong reaction to apparently hawkish comments by some FOMC members last time around.

Finally, neither Republicans nor Democrats seem serious in trying to avoid the “sequester” scheduled to go into effect in less than two weeks. The most likely scenario is that the sequester does take effect but that, in the months to come, both sides find some ways to replace the most egregious cuts. Nevertheless, both the reductions in government discretionary spending in the short-run and the lack of clarity on long-term fiscal adjustments will act as an unnecessary drag on economic progress.

Despite all of this, the U.S. economy appears to be weathering both contractionary fiscal policy at home and soft economies overseas. This reality appears to have convinced many individual investors to re-engage in stocks with equity mutual funds seeing their biggest inflows in at least five years in January. And while neither monetary nor fiscal authorities are inspiring much confidence at the moment, the combination of moderate stock prices and very expensive bond prices suggests that, for once, individual investors are betting the right way.